How we (unconsciously) make bad decisions

19 July 2016 -

And how mindfulness training can help

Guest bloggers Matt Tenney and Tim Gard

Two key elements of business acumen are making decisions that add more value for the end customer and our organisation and achieving goals with the least use of finite resources possible; time and money are important examples.

Most, if not all, leaders know that the essence of profitability is the ability to achieve higher gross margins and lower general expenses. However, many leaders are not successful at doing this.

The problem isn’t that we don’t know what to do. The problem is that we are subject to cognitive biases—ways of deciding and acting that result from a lifetime of conditioning—which cause us to unconsciously make decisions that are less than optimal.

The idea of cognitive biases was introduced by Amos Tversky and Daniel Kahneman in the early 1970s. Their work showed quite clearly that humans often make decisions that deviate substantially from what strict rationale would indicate is the correct choice.

In other words, we often do things that simply don’t make sense.

Tversky and Kahneman also showed that they could predict quite accurately when people would act irrationally, because the irrational behavior was due to measurable cognitive biases. This work on cognitive biases became the foundation for the field of behavioral economics and resulted in Kahneman winning the Nobel Prize in 2002.

There is both good news and bad news that come with this exploration of cognitive biases.

First, the bad news:

We all have cognitive biases.

Many of them lead to negative impacts on the profit and loss (P&L) statement, both through decisions made directly by the individual leader and the influence the leader has on the decisions of others.

Unless we have a very high level of self-awareness, the cognitive biases are usually completely unconscious. We’re simply not aware of the conditioned patterns of deciding and acting that negatively affect gross margins and expenses.

There are several pieces of good news, however:

It’s possible to measure our cognitive biases quite accurately with a well-designed assessment. Although he didn’t win a Nobel Prize, my colleague at the Perth Leadership Institute, Dr. E. Ted Prince, conducted research that was published in highly respected, peer-reviewed journals, which included hundreds of executives over a period of more than 12 years. He discovered 10 cognitive biases that have significant impacts on the P&L: five biases that affect gross margins and five that affect expenses. This research became the foundation for the assessments created by the Perth Leadership Institute designed to measure those 10 cognitive biases.

Once we have a better sense of our cognitive biases, we have a much better chance of being able to recognise when we’re about to make habitual, conditioned decisions that would have a negative impact on gross margins or expenses.

With continued mindfulness training, we can further enhance our ability to recognise when we’re about to make a habitual, conditioned decision.

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